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2015 (6) TMI 312 - ITAT MUMBAI

2015 (6) TMI 312 - ITAT MUMBAI - TMI - Addition u/s. 41(1) - cessation of liability of outstanding interest shown as payable by the assessee to his group concern - CIT(A) deleted the addition - Held that:- The assessment year under consideration is A.Y. 2008-09 in respect of which, the A.O. noticed that the assessee had continuously avoided the payment of tax by showing the said interest liability as payable, whereas the creditor AOP had not shown it as its ‘income’ because of the different acco .....

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thing but an afterthought to avoid the consequence of addition made by the A.O. during the assessment proceedings for the year consideration. In view of this, we do not agree with the contention of the assessee in this respect. In view of our observation made above, we hold that the A.O. has rightly made the addition u/s.41(1) of the Act in this case and the same is confirmed. The order of the ld. CIT(A) is set aside and that of the A.O. is restored on this issue. - Decided against assesse. - I. .....

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de by the A.O. u/s. 41(1) of the Act on account of cessation of liability of outstanding interest shown as payable by the assessee to his group concern. 2. The brief facts of the case are that the assessee had borrowed the loan from its sister concerned M/s. Lok Financiers Company (LFC), an Association of Persons (AOP) earlier to A.Y. 1997-98. The interest payable on borrowed loan has continuously shown as expenditure as the assessee has been following the mercantile system of accounting. In the .....

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t LFC has been an AOP and has been in the business of finance. The assessee had borrowed monies from the said AOP. Due to restrictions brought in by the RBI, the said AOP could not carry on its finance business. Whereas the principal amount was repaid by the assessee, the interest payable was still outstanding and that the liability had not ceased till then. The A.O., however, noticed that the accrued interest was not paid by the assessee for so many years even though the assessee was in the cap .....

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LFC starting from A.Y. 1999-2000 onwards was not shown as income , as the same was not paid by the assessee. The assessee on the one hand had claimed the expenditure on accrual basis, whereas, the LFC (AOP) had not claimed its income because of switching over of accounting system from mercantile to cash system. The A.O. also observed that in the balance-sheet and the profit and loss account of LFC for A.Y. 2008-09, the said AOP had distributed the share of profit amongst the five members who ar .....

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eceivable income, but, the assessee and his group AOP have managed the affairs in such a dubious way that on the one hand the amount of interest was claimed by the assessee as deduction in his P & L account and on the other hand he had not been letting the amount to be offered to tax by his sister concern, LFC. The A.O. observed that this was a method deployed by the assessee to avoid the tax. He, therefore, treated the said amount as income of the assessee for the year under consideration a .....

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orrowed loan is being shown as an expenditure as the assessee is following mercantile system of accounting from year to year. In the AY. 2002-03, the entire capital loan amount was paid off/adjusted towards allocation of shares. Therefore, what remains outstanding was accumulated interest of ₹ 42,67.650/- pertaining to A. Y. 1999-2000. 2002-03. This interest has not been paid till date and appearing as the outstanding interest in the latest balance sheet of the appellant. At the same time, .....

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now following an duly accepted by the department - the cash system accounting for the receipt & expenditure the company has not shown an interest of ₹ 42,67,550/- being receivables from the appellant. On carefully going through the entire facts of the case, I find that because of the cash method of accounting - M/s. Lok Financiers Company has not accounted for the interest receivable and not actually received. The provision of Section 41 (1) of the I.T. Act as invoked by the A.O. will .....

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2 ITR 344 (c) CIT vs. Sugauli Sugar Works P. Ltd. 102 Taxman 713 (d) Chief CIT vs. Kesaria Tea Co. Ltd. (2002) 254 ITR 434 and more particularly unreported judgement of Hon'ble Delhi High Court in the case of Dalmia Finance Ltd. (Appeal No. 833/2010. dated 15.07.2010), I hold that the provision of Section 41 (1) cannot be invoked in the present circumstances for the reason that the appellant had neither received any benefit nor any advantage and liability in the form of interest is outstandi .....

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to cash system from the mercantile system of accounting w.e.f. A.Y. 1998-99, the company had not showed the interest of ₹ 42,67,550/- being receivable from the assessee because of the fact that the same was not actually received. He, therefore, has held that the provision of section 41(1) of the Act are not applicable as the amount of interest payable has not been written off nor the debt has extinguished. The ld. DR, before us has contended that it was not a case where the debt was payabl .....

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t. The assessee had been continuously showing the amount as payable in his books of account. He has further contended that mere lapse of time or due to the fact that due to limitation period of recover the amount through judicial intervention has expired, that itself, is not sufficient to hold that the liability has ceased to exist. To stress his point, he has relied upon a catena of judgments e.g. CIT vs. Jain Exports Pvt. Ltd. [2013] 89 DTR 265 (Del); CIT vs. Kesaria Tea Company Ltd. [2012] 25 .....

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ad also not written off the said receivables. The parties to whom the amount was payable were third parties. Under such circumstances, the various higher courts have held that merely because the limitation period to recover the amount through process of court had lapsed, that itself, does not mean that the liability has ceased to exist. The principle led that the enforcement of debt being barred by limitation does not ifso facto lead to the conclusion that there is extinguishment of debt itself. .....

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s of his share from the AOP but on the other hand has been showing the liability of interest as payable to the said AOP, without adjustment/setting off the same out of the receivables from the said AOP. By changing the method of accounting of the AOP, the expenditure of interest claimed by the assessee in his P & L a/c is avoided from taxation at the hands of the AOP as the same is not shown as income. The argument that the change of method of accounting of the said AOP has been accepted by .....

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the said AOP for the years together. The above conduct shows that it is a deliberate and intentional act to avoid tax. Had the assessee had any intention to pay the liability, he could have adjusted the same against the share of profits received from the said AOP. The peculiar facts of the present case show that it was not a simple case where the assessee due to some circumstances could not pay the liability but had intention to pay the liability and that the debt had not extinguished, but, it .....

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